Companies stop innovating

When companies grow and stop being entrepreneurial, it is because they get institutionalised. There is a strong correlation between market capitalizations and stakeholder perception of corporate strategy. So the market is efficient.

Published 2014-03-17

7 factors preventing innovation

There is a continuous analysis of the performance of corporate strategies and the companies’ role in society. In this respect we will get a true answer from the market. The market valuations are showing us which companies will survive.

Large established corporates can’t innovate. The approach appears to be gradual and continuous improvement but no leaps. The radical improvement in the furniture industry that happened when IKEA started selling not-yet assembled furniture is not likely to repeat itself. Large corporates can milk their brands and make improvements but do nothing substantial.

Something happens when companies grow. They lose their ability to innovate. Focus is changed from doing the right things to do things right. The unavoidable journey towards death has begun. There are 7 main threats we need to contemplate:

1. The recruitment focus changes. Having originally looked for original thinkers, the people that placed the company on the map, we now have a HR department. Newly hired people are just right, just average. They absorb the departmental culture. These new managers add no value. Today IKEA wouldn’t have hired Ingvar Kamprad and Ericsson would not have interviewed Lars Magnus. The original thinking of these great persons would not have been very popular. No departmental manager would have liked to be responsible for these wild guns. Predictable employees are preferable.

2. The wrong owners. The original founders have made an exit and sold to administrators. And these investors are so content with their investment they don’t want to change anything. The original thinking that started the company and made it a success, was the ability to capitalize on a changing environment, but the new owners prefers a predictable life. Wrong owners lead to falling values. Whatever they think is low risk is high risk. The only way to maintain the value is to challenge the future.

3. The organisation starts to live its own life. There are departments and there are positions. The employees have mortgages and realize the importance of having a job. They have lost focus on their role. All change is prevented. Maybe we haven’t given the golden exceptions Apple and Google enough credit. They managed to grow, but kept an entrepreneurial spirit with room for free spirits. In the same manner Volvo and Audi could have grabbed the expanding electric car market. But Tesla took it. The correct answer is that a mature organisation would never allow a wild idea to get enough oxygen to threaten the various positions in the organisation. The people that have important roles in traditional manufacturing.

4. Internal recruiting is prioritized. The existing corporate culture is getting more obvious and is taking more space, isolated from reality. The most predictable people are in the organisation and part of the right culture.

5. Consensus is becoming important. Creative people are fighting a losing battle. We need our positions and realize we need to be politically correct.

6. Focus on margins. Predictable financial reports suit the new owners and the manager’s existence. This may be the most serious threat. This is what threatens innovation. The short view, give the market gradually improving margins, beats the longer value-building view. The company reduces innovation and the company’s role in society. We call it quarterly capitalism but financial myopia may be a better term. Or organizational anorexia. This is where corporate death is decided upon but the actual final moment is postponed for a while.

7. Gradual systematic improvements. In order to build an innovative image, staffs accept gradual improvements. New competitors, people with new technical ideas, will run circles around the systematic improvements. IKEA have improved its competitive standing through gradual improvements but it isn’t what started the company. It was radical new thinking.

It is of great importance that all stakeholders are engaged in companies. Maybe we shouldn’t let the shareholder decide the fate of the largest, most important companies. Our entire society is dependent upon our continued competitive standing and at this point in time, management teams and institutional owners are not very convincing.

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EQapital writes for people who are interested in a public companies. It can of course be shareholders but also employees, customers, suppliers and other stakeholders. We think they have a common interest in that the company strengthens its competitiveness through good strategic choices.

We therefore focus less on immediate profitability and short-term quarterly economy but feels that more innovation, a responsible society, and communication is more important for the long-term value creation in companies.

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